What is Cost to Company or CTC salary? How is it calculated?

If your CTC package is so high,

why do you get so little in hand? This article explains it all.
Your company offered you a salary of Rs. 6 Lakhs per year. That means you should be getting Rs. 50,000
in hand every month. Even if you consider income tax, you should be getting about Rs. 40,000 in hand.

But you get only Rs. 32,000 in-hand every month! Why? Where did the promised money vanish?
Is your company cheating you?

No! It is because the company promised you the salary as Cost to Company, or CTC.

So, what exactly is CTC?

The concept of Cost to Company (CTC)

Simply speaking, CTC is the amount that you cost your company. That is, it is the amount that
the company spends – directly or indirectly – because of employing you.

Thus, it is the money given to you (your in-hand component), plus the money spent because of
you.

You’ll understand this better while we discuss the various components of your CTC salary, so
let’s jump into it right away! We will also use an example parallel to the discussion, so that you
can understand the concept of CTC better.

Components of Cost to Company (CTC) Salary

In “Understanding components of your salary”, we saw the various components of your in-
hand salary.

These are:

 Basic
 Dearness Allowance (DA)
 Incentives or bonuses
 Conveyance allowance
 House Rent Allowance (HRA)
 Medical allowance
 Leave Travel Allowance or Concession (LTA / LTC)
 Vehicle Allowance
 Telephone / Mobile Phone Allowance
 Special Allowance

All the above are a part of your in-hand salary, and therefore, are a part of your CTC pay as well.
Example: Let’s understand this using a simple example. Say your basic is Rs. 15,000 per month,
DA is Rs. 10,000 per month, you get conveyance allowance of Rs. 800 per month, and you get
HRA of Rs. 4,500 per month. So, your package so far is Rs. 3,63,600 per year.

Now let’s look at some of the other components of your CTC pay – the parts that inflate your
CTC package but may not be actually given to you!

Company’s contribution to Provident Fund (PF)

It is mandatory for you to contribute 12% of your basic towards provident fund (PF). Your
employer makes an equal contribution (12% of your basic) to your PF account.

(Please read “Provident Fund (PF) and Voluntary Provident Fund (VPF)” to know more
about provident fund)

So, although this amount is not given out to you every month, for your company, it is an expense
that it incurs on you every month! Therefore, this forms a part of your CTC pay.

Example: 12% of your basic is Rs. 1,800 per month. That is, Rs. 21,600 per annum. Your CTC
package becomes Rs. 3,85,200.

Reimbursements

Various reimbursements that you get from your company can also form a part of your CTC
package.

This includes reimbursement of:

 Medical bills
 Phone bills
 Magazine subscriptions
 Book purchases, etc.

Example: Say you get reimbursement of medical bills of upto Rs. 15,000. So, your CTC package
becomes Rs. 4,00,200.

Life Insurance and Health insurance

Most respectable employers provide free health insurance cover to their employees and their
dependents. Some companies also provide life insurance for their employees free of cost.
The premium amounts paid for such insurance on your behalf can be included in your CTC
salary.

Example: Say you get a health insurance cover of Rs. 1 Lakh for yourself and your family. The
premium for this is Rs. 2,000. Thus, your CTC package becomes Rs. 4,02,200.

Medical Facilities

Many companies have in-house health centers, hospitals or other health care facilities where
medical care is provided free of cost to employees.

Companies work out a per-employee cost for such facilities, and can include that in your CTC
pay package.

Transport Facilities

Many companies provide free transport facility to their employees from their place of work to
the job location.

The cost of such transportation can be added to your CTC package.

Subsidized Meals

Many companies run canteens or cafeterias for their employees, which provide subsidised meals
to the employees. Such subsidy can be included in your cost to company package.

Example: Let’s say your company provides you lunch for Rs. 10, and the actual cost of that
lunch is Rs. 25. Thus, there is a subsidy of Rs. 15 per meal.

For 21 working days in a month, this is Rs. 315. Or, Rs. 3,780 per year. Thus, your CTC
package becomes Rs. 4,05,980.

Taking it too far

The components of your CTC salary sound reasonable so far, right? After all, this is the money
that you get in one form or the other.

But some companies take the concept of cost-to-company too far! Look at the following:

Office phone bill

The bill for the office phone that you use can be included in your CTC salary too.

Office space rent

Shocked? Its true! There are many companies – especially large investment banks – that include
your office space rent in your CTC package!! Yes, it defies logic, but it is true!

Example: Let’s say your office is in Churchgate in Mumbai. Your have a small cubicle, say 6
feet by 8 feet (48 square feet). Let’s say the going rate for rent for office space in that area is Rs.
200 per sq. ft. per month.

What is the cost of your cubicle in that case? Its Rs. 200 * 48 = Rs. 9,600 per month, or Rs.
1,15,200 per year.

When this is included in your CTC, your overall CTC package becomes Rs. 5,21,180!

A side note: Remember this when you read about the whopping, exorbitant salaries paid out to
fresh management graduates (Like the IIM Ahmedabad MBAs)! Their large salaries might
include the office space rent as well!!

A note on government salaries

We often hear people say that the salary of government employees is quite low.

Although there is truth in this, government salaries wouldn't seem too less if we look at it from a
“CTC” point of view.

When we talk about government salaries, we only talk about the “in-hand” component. But we
forget that on a cost-to-company basis, it can be quite substantial.

What extras do government servants get? Here's a sample list:

 The 12% of basic that the government deposits in their PF accounts, just like private
companies
 Membership of government clubs or gymkhanas
 Free stay at various circuit houses and government guest houses
 Free telephone connection at home
 Free car with driver
 Reimbursement of newspaper bills
 Free use of many libraries
 In case of defense personnel (Army / Navy / Air Force), a huge subsidy on items bought
from their “canteens” (like groceries, appliances, etc.)
When these things are taken into account and salaries of government employees is considered on
a cost to company (CTC) basis, it won't seem too less compared to the private sector!

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CTC
Explanation given above for CTC really wonderful, i am very clear now and i am in big
confusion before reading this now i know what it means to be. Thanks for the brief explanation.
 CTC BASIC RATIO
Your posts about the CTC components is very helpful. Need some clarification about the ideal
fixed versus variable component. As you explained, a lot of companies will offer CTCs of 10-15
Lakhs but the basic is around 20-30K (about 20-25% of CTC) with the rest taken by allowances
and variable components. Is that a good thing or can the package be customized ? Is there some
ideal ratio that one should look for? Thanks.

CTC
Explanation given above for CTC really wonderful, I am really impressed with the clarification
narration and always welcome such forum.

AMAZING JOB
Am impressed by your writing skills, details are very easy to understand. Keep up the good
work, and Thanks a million to you for making this information available for people. God Bless

GROSS EARNING VS CTC SALARY

I'ma member of inhouse PF in with my employer with a 100% contribution from me alone, that
happened after i was transferred from the previous PF where there the setup was 50/50 and the
company changed the pay package structure by adding the 50% of their contribution and stated
that i'm earning a ctc salary.

Why i'm confused is that the PF rules says that i'm not contributing but my employer does on my
behalf however the 50% that i use to contribute is included in that 100% contribution.

My Gross earning is the same as CTC package is that a CTC Salary?

Please hulp this is confusing me'

 REGARDING GRATUITY AS A COMPONENT
Hey,first i would like to thank you for such a wonderful job.
This knowledge is really practical.
I have a doubt. Whether this gratuity benefits also forms a component of CTC salary?
Because as explained,it too costs the company,even thou very late during retirement or
resignation of the employee.
If yes,those who are not eligible on the grounds that they were unable to complete,say 5 years of
job,why they are liable to pay for the gratuity amount to company,even thou they don't recieve it
finally..
And if it is not a component of CTC salary,whether company pay it from its own pocket?
Will be expecting your reply..

I've a peculiar problem regarding a single premium life insurance of tenure 15 years
bought by my employer on employee's name 2 years back. Initial idea was to withdraw this
facility if the employee resigns. But then they chose to extend the benefit beyond resignation, but
at a proportionate price. In this scheme, I would need to pay the complete premium amount back
to the company and the company would reimburse back proportionate amount every year till
employee serves the company. Will this reimbursement be taxable? Is there a better idea in
implementing the above?

TAX IMPLICATIONS OF VARIOUS SALARY COMPONENTS

Have a question: Many companies offer a flexible salary structure wherein one can decide how
to split his total salary into various types of allowances and reimbursements to suit his/her need
and avail tax savings. My company also offers this, with several "reimbursement" options. How
are these reimbursements taxed? For instance, there is a head for car operating expenses for
company leased vehicle. My company documentation states the following:

"Currently, as per Income Tax Act, the company provided cars are valued as taxable perquisites
in the hands of the employees at Rs. 1800/- per month if the cubic capacity of engine does not
exceed 1.6 liters and Rs. 2400/- where cubic capacity of engine exceeds 1.6 liters."

I am not able to understand the tax implications of the above. Can you please help?